Monetary Policy Without a Frozen Aggregate Supply Curve. A Literature Review

Abstract

Purpose – The article reviews the literature on the interactions between aggregate demand and aggregate supply. It discusses the relevance of the presented mechanisms for the current economic situation, especially due to the ongoing monetary tightening in major economies. Research method – The article is based on a review of the literature on the linkages between aggregate demand and aggregate supply shocks. Results – According to the presented models, heightened corporate debt makes firms more vulnerable to financial shocks, including an unexpected increase in interest rates. As a result, tight credit conditions (due to monetary tightening) may reduce aggregate demand and aggregate supply, with ambiguous effects on general price level and inflation rate. Originality /value /implications /recommendations – The review summarises the broad but overlooked literature on the links between aggregate demand disturbances and shocks to aggregate supply. The paper’s originality lies in its attempt to present the literature in relation to ongoing increases in the policy of interest rates around the world.